Q2FY19 Preview: IT firms to report higher sequential EBIT margin on Re Fall

By:Manmeet Kaur Tura 2018-11-19

It is expected that the IT firms shall declare a combined 1.5 per cent QoQ growth in US dollar revenue in the 2QFY19. The strengthening of the US dollar as compared to major currencies including euro, GBP (British pound) and Australian dollar shall adversely affect the reported US dollar revenue.

There shall be a 50-130 bps adverse impact of cross-currencies in 2QFY19E. The top five IT firms are prone to post 1 per cent to +2 per cent QoQ increase in US dollar revenue (0.5 per cent - 3.3 per cent QoQ in CC terms), with TCS coming out to be the leader of the pack (2 per cent QoQ US dollar growth, 3.3 per cent in CC terms).

If we analyze the mid-sized firms, they are expected to see a considerable growth with Cyient leading the pack (3.6 per cent QoQ US dollar growth, 4.7 per cent in CC terms).  KPIT Technologies shall be the next to follow (2.8 per cent QoQ US dollar growth, 3.6 per cent in CC terms) along with Mindtree (2.7 per cent QoQ US dollar growth, 3.5 per cent in CC terms). But Persistent Systems (1.6 per cent QoQ US dollar growth, 1.9 per cent in CC terms) shall not be on a very positive front because of the unfavorable QoQ comparison. Focusing on the rupee, revenue growth shall come in at 0-8 per cent QoQ due to rupee depreciation of 4.5 per cent QoQ.

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On the margin front, we are looking forward to an upward trend backed up by revenue growth, rupee depreciation, wage hike impact, mostly behind and operational efficiency. Among top-tier firms,  Tech Mahindra (TechM) shall post 106 bps QoQ margin expansions, due to the currency and operational efficiency. We shall anticipate TCS and Infosys to account for a margin expansion of 62 bps and 72 bps QoQ, respectively, while HCL shall see a margin rise of 47 bps QoQ. The strongest margin growth shall be expected to be shown by Cyient (+184 bps QoQ) and Hexaware Technologies (+129 bps QoQ). On the other hand, due to a wage hike KPIT Technologies is likely to post 60 bps QoQ fall in margin. On YoY basis, margin performance is positive for 10 out of 14 companies under our IT coverage universe prone to post expansion of 30-470 bps (excluding Majesco).

Return of cash to shareholders is a tactic that continues to play out, with TCS, Infosys, Wipro, HCLT, Hexaware, Mindtree and eClerx all resorting to share buybacks in the past year to make efficient use of their cash balances.

Margins to Trend Higher on Rupee Weakness

We anticipate IT firms to report massively higher sequential EBIT margin in 2QFY19E due to rupee fall, operational competence, wage hike largely behind and revenue growth. Focusing on the top-tier IT firms, TechM’s margin is anticipated to expand by 106 bps QoQ owing to favorable currency movement and enhanced operational efficiency and in our mid-cap universe, Cyient is expected to have the strongest margin performance (+184bps QoQ).